A 1992 probe should be under the necessity raised red flags when novel tips came in about Madoff. Now critics question the agency’s ability to act as a watchdog

By Peter Burrows

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Financier Bernard Madoff was arrested on Dec. 11 and charged with allegedly running a $50 billion Ponzi design. Justin Lane/Corbis

Bernard L. Madoff operated onward the brink; beginning for years. But an early join battle with with the Securities & Exchange Commission didn’t raise red flags about the financier now accused of running a ponderous deception. It’session the type of missed opportunity that’s further eroding investor confidence and prompting Congress to explore regulatory reforms.

The SEC’s interest in Madoff goes back to at least 1992. That year the federal watchdog sanctioned three small firms raising money exclusively in the place of Madoff. After investigating a confidential tip that one of the money managers was promising annual returns of up to 20%, the SEC prohibit them all down for selling unregistered shares. (Under federal rules any sinewy that sells securities to a U.S. investor must file certain documents first.)

Madoff, whose books were examined soon after by dint of. the SEC, was never sued by the agency of dint of. the regulator. But as part of a settlement, the firms, which neither admitted nor denied liability, had to repay investors. That forced Madoff to go the money they raised for him, some $454 million. "Somehow, he got it done over a weekend," says a person familiar with the firms.

It’s not clear whether Madoff was already developing what authorities lay claim to may be the biggest monetary deception ever—an alleged scam that collected money from new investors to pay off earlier ones. But that’s just the species of shenanigans regulators initially suspected they had uncovered in the 1992 probe: a Ponzi scheme perpetrated by the three firms. When investigators skilled the money had been funneled to a Wall Street titan, Madoff, they became less concerned approximately outright deception. After total, Madoff, a former chairman of the Nasdaq stock market, was a pioneer in electronic trading. The Madoff sexual commerce "was a good thing" for the firms, says a living body close to the SEC investigation. "Nothing improper was found [in Madoff’s books]."

In hindsight, the episode should have been remembered a decade later when regulators started receiving without the name of the author tips about potential improprieties at Madoff’s operations; but the resulting inquiries yielded nothing significant. That they did not raises serious questions about the SEC’s skilfulness to battle and intercept fraud. "The commission doesn’t seem to own pursued its enforcement charge with sufficiency tone," says noted SEC historian Joel Seligman, president of the University of Rochester.

Congress direct hold hearings in January to discuss why the SEC failed to uncover the Madoff mess. Critics decide the SEC doesn’t have the manpower or the systems to provide the necessary oversight. "The SEC needs more staffing in both its enforcement and examination divisions," says Ron ­Geffner, a quondam SEC staff attorney, now a advocate at Sadis & Goldberg. "It needs to act the part of a process in which recidivists are reviewed with greater exploration." Madoff and the SEC declined to annotate.

The 1992 investigation centered upon the body Avellino & Bienes, a pygmean New York accounting firm run by Frank Avellino and Michael Bienes. According to court filings, the duo started raising riches from clients, friends, and relatives 30 years earlier, handing the coin over to Madoff to invest. By 1984, Avellino and Bienes had ditched their accounting practice altogether to converging-point exclusively upon finding investors for Madoff. Avellino and Bienes didn’t return calls.

The firm had its own "feeders," associates who rounded up turn into money that eventually made its way to Madoff. In 1989 accountants Steven Mendelow and Edward Glantz, whose office was on the same floor as Avellino & Bienes in a Manhattan duty building, joined the game. According to the SEC’s complaint, Mendelow and Glantz collected $89 million for Avellino & Bienes. Glantz’s son Richard later started raising money as well. The league ended in 1992 when the SEC demanded in a settlement that the firms close up shop, reimburse $454 million to 3,200 investors, and pay a collective $875,000 fine. Edward Glantz has since passed away. Mendelow couldn’t be reached.

Within a year or two of the SEC inquiry, Madoff was accepting money from at least one player who didn’confidentially chronicle shares with the SEC, according to a person familiar with the operation. In some effort to rebuild his investing. practice after the probe, Madoff also dropped his minimum account size from $1 million to $50,000 for at least one feeder fund. As a result, less affluent investors gained entrée to Madoff’s operation. That’s one reason it’s not just wealthy investors and institutions who are ensnared through the now passing shame.

Rather than viewing Madoff as a scofflaw, regulators called on him for his expertise. Edwin Nordlinger, an SEC staffer involved in the Avellino & Bienes investigation, recalls accompanying a new SEC commissioner on a inspect in the a day after the fair ’90s with Madoff, who schooled the regulator on over-the-counter markets. Arthur Levitt, ­chairman of the SEC from 1993-2001, has said publicly he consulted with Madoff during his tenure. Says ­Nordlinger: "Madoff was considered an expert."